NQ Logic

Technology | Strategy | Consulting

The New Google Mobile Strategy

As rumors of a phone made by Google resurface, inflating again newsrooms and technology blogs with vivid commentary, it is time to step back and contemplate what Google did over the past 10 years, draw what could be their mobile strategy, and see if a Google phone would make sense after all.

What Is Google Really?

Google is the world’s leader in the advertising industry,but managed by engineers.

With 20,000 employees around the globe and U$ 21.8bn revenue in 2008, Google topped WPP, the world leader of the more traditional advertising industry, a company that has 100,000 employees and generated U$ 13.6bn revenue in 2008. Google was the equivalent of a 1/3 of the world's top 50 agency companies in 2008 [AdAge].

In its 10 years of existence, Google managed to ride the market based on a search software patent, overshadow its competitors, combine a vast network of suppliers/partners, and find a successful way to propose at a very low marginal cost for them the “right message, to the right person, at the right time”. Google built a global brand [ranked #7, 2009 Interbrand] that is synonymous today with “low price and high functionality with added transparency” in many people’s minds.

But with 99% of its revenue coming solely from online advertising, and with 65% market share of the U.S. web search, Google had to define a different growth strategy for appeasing its investors and fulfilling its grand vision of changing the planet for the better.

All media have been investigated by the Silicon Valley giant: newspapers, magazines, radio, video, photos, maps, books, encyclopedias, TV, comics, machines, social network and mobile. But with the potential to be as big as Google’s core online advertising business, mobile advertising has been promoted as a key piece of Google strategy for many years.

“The most obvious large space of advertising is the mobile internet. The next big wave in advertising is the mobile internet” – CEO Eric Schmidt (May 2008)

How Big Is the Mobile Advertising Business?

The confusion is quite vivid when it comes to estimating the mobile advertising market for 2008: $1.0bn [Deloitte], $1.4bn [Strategy Analytics], $2.7bn [Gartner], $4.2bn [eMarketer], or even $5.5bn [Juniper Research]. This wide range of estimates is a flagrant proof that today the market is not clearly measured at the start, undervalued at least, and untapped at best. All statistics providers point to one direction thus, the exponential growth that the mobile advertising industry has ahead of its nascent life. How could it be otherwise?

For some perspective, the mobile phone industry itself is a one-trillion dollar industry (U$ 1,000,000,000,000), and is equivalent in economic size to the worldwide automobile industry. In 2008, mobile manufacturers shipped a total of 1.18 billion new mobile phones worldwide [IDC]. More new phones were sold that year than personal computers, including PDAs, desktops, laptops, servers and netbooks (which totaled 1 billion). There were more phones (3.4 billion connected phones) than cars on the planet (800 million). The mobile phone is now a technology that has 4 billion subscribers, and with 10% of them having smartphones as the device of choice.

The mobile device is the most common instrument used on the planet and it has yet to start its advertising revolution.

Mobile Ecosystem Has Been Disrupted

The mobile industry is certainly one of the most complex and most regulated technology businesses in the world, and it is not possible to speak about the industry without mentioning the three heads of this trillion-dollar dragon. The CIT has evolved in the recent years into a regular battle field between the Device, the Connection and the Content corporate giants.

The Content side (magazines, newspaper, music, TV and movies, to name a few) has been in the past few years under severe business distress due to two major trends. On one hand, P2P exchange platforms, responsible for 27%-55% of the internet traffic, have floored the content price to zero in the consumer mindset. On the other hand, free user-generated content (e.g., Facebook) and crowd-sourced platforms (e.g., Wikipedia) finished off the remaining content providers’ business models by sweeping the users’ attention span. Until now, no traditional content provider has yet found a successful business model to counter, or monetize, on these two global trends.

Connection and Device companies have been colluding for years and have always proposed their winning combo to consumers: a package including a two-year connection, locked-in contract with a subsidized phone.

The conglomerates have spent massive amounts of money in lobbying groups, think tanks, lawyers and mass media message in order to gain a brief advantage that will last long enough until a fast-growing or disruptive competitor will take their leading spot. And until 2007, none of these players stepped on each others’ toes, and they were very careful in growing their market share and competing within their own respected bandwidth.

It all stopped when Apple introduced iTunes and iPod and then its iPhone as a huge success story. Apple integrated the Content delivery with the Device experience and attracted music customers to a new business proposition: easily buy a single song at a marginal price. Apple then introduced a much more technically advanced mobile phone device, opening its application development to external parties and using its brand appeal, forcing the Connection company (AT&T in the US, and then later all major telecommunications contenders in the world in a domino effect) to a price point acceptable to trendy, early adopter consumers. In filling the content delivery gap, Apple managed to create a billion dollar revenue business, and lead the way for other smartphone makers.

Today Apple is settling nicely in its dominant position in the distribution platform business with over 110,000 applications already approved, outweighing any other contender in the business. This attracts more developers fueled by recurrent success stories (i.e., iShoot, Trism, Tap Tap Revenge), therefore expanding Apple's application catalogue and reinforcing the network effect.

Smartphone Ecosystem Map

What Google Has Done So Far

After a successful experience in 2001 with the launch of the first mobile search engine on NTT DoCoMo I-mode mobile phones in Japan, Google was fully convinced to tackle the mobile phone, the best advertising device invented so far (a personal piece of equipment carried everywhere and turned on all the time). But it had to come up with a different approach to bypass the constant pushback from telecommunications players and phone makers they faced repeatedly over the years. To rapidly gain a large market share, Google had to be disruptive and offer the first free, intelligent, open-source open platform software to the phone makers.

It all started seriously in August 2005, when Google acquired Android, a start-up founded by Andy Rubin. Rubin was an engineer at Apple and General Magic, and gained some well-deserved recognition for heading WebTV and subsequently Danger Inc, which was acquired by Microsoft in 2008. Android was developed under the same concept as the winning Danger Hiptop (a.k.a. T-Mobile Sidekick) : a tiny real-time OS running both the signaling stacks and a Java Virtual Machine, with a Java-based application suite running on top of it.

The same year, after acquiring Skia’s graphic technology and Reqwireless’s Java ME web browser WebViewer, Google’s Android mobile operating systems (led officially now by Andy Rubin) was ready for a long incubation. With a large engineering workforce dedicated to building the next mobile software, Google then had to focus on [1] assembling a coalition of phone makers to distribute the software (which it did with Open Handset Alliance), and [2] paving the road for open services (open applications, open devices, open services and open networks) in the wireless world (which it did with the 700 MHz license bid).

Along the way, Google picked some more or less successful start-ups to complement its expertise: Dodgeball, a mobile social networking; allPAY GmbH a SMS payment system, GrandCentral Communications, a voice communications services; Zingku, another social network service; and Jaiku, a Twitter-like micro-blogging platform. Most recently, Google expanded its capability with the $750m acquisition of AdMob (third largest acquisition behind its 2008 purchase of Doubleclick for $3.1bn and its 2006 buyout of YouTube for $1.65bn) and for another $30m, bought Gizmo5 also on the same busy day of Nov 9th, 2009.

With the snap purchase of AdMob, Google became overnight the largest player in the mobile advertising industry with an estimated 30-40% market share, and also acquired a complementary and interactive advertising technology based on ad display at the application level. Google could now integrate a broad range of devices (including the iPhone) at a minimal integration cost since DoubleClick Mobile already offered AdMob as a potential ads network along AdSense since last year.

With the Gizmo5 acquisition, Google filled a SIP knowledge gap for their Google Voice product. Gizmo5 technology will help to connect the voice service to any web service, or make it available through API for future integration to external applications.

Since the Android acquisition in August 2005, Google also released many mobile services: an online application software store [Android Market], a telecommunications service providing unified phone numbers and leveraging VoIP technology [Google Voice], a location-based service [Google Latitude] that updates automatically location status and visualize friends' position on a map, and also a GPS navigation system and turn-by-turn voice guidance with automatic rerouting and crowd-sourcing congestion data update [Google Maps Navigation]. The day of the announcement TomTom’s shares were 30% down. All other live news update tools (Scoreboard, Google News), or knowledge-sharing tools (Translations, Sky Map, Finance, MyMaps, Google Calendar, Google Maps and Gmail) and search tools (Local Search, Google Search) are now complemented by the 16,000 externally developed applications proposed on the Android Market.

What Google Could Do Next

Now that Google has secured the development, launched a full mobile OS software, has a coalition of phone makers ready to integrate the latest hardware innovation, and aggregated a large market place for applications, it must be time to [1] integrate [2] monetize and [3] fill the architecture/business gap.

The mobile user interface integration, the ads network distribution aggregation and the technology migrations will help Google leverage their competencies and monetize their sheer network of partners. Some minor technology gap will be filled in start-up acquisitions in the next few months (pick your best bet), but quarterly revenue announcements will tell us when the company would have finally executed the potential promises of the mobile revolution.

What is more interesting is to connect the following random dots into an ideal mobile offering picture:

PaymentLeveraging their massive consumer trust, Google mobile platform should build a payment system, and the patent has been registered few years back. On the same token, an e-wallet has never been mentioned but should interest at least some major US banks who tried to penetrate the difficult labyrinth of technology.

BandwidthThe current limitation in the wireless world is the restricted bandwidth shared among the 3.4 billion mobile phones. Offering a more powerful device in the hands of enthusiastic mobile users will not solve the problem. Some investigation should be made from the technical perspective (transfer optimization, data compression…) and from the business perspective (co-investing in the 4G network upgrade, revenue sharing ...).

VoiceBreaking the unpopular, two-year lock-in contract and removing the “bill shock” by migrating over to the data-driven, flat fee, all-you-can-eat buffet contract would certainly explode the Google Voice invite requests. Skype just finished their spin-off from eBay, and is valued at $2.75bn, a small price for the biggest telecommunication company in the world with half billion users. Google's constant push to accelerate the IP migration to IPv6 is aligned with a future vision where a fixed IP address will be given to "everything” connected to the web (phone, machine, human, car, house, RFID-tagged object …)

StorageWith an ever-increasing dependency on a single mobile phone device for everything in life, its data replication and backup will become critical for its utility for people. Cloud computing is giving us the answer for easy data portability, migration and replication over a wireless world. A special GDrive offering dedicated to Android mobile phones could finally fit the bill, and help the company to understand the B2C Cloud business.

What About the Google Phone?

In short, no.

It seems to me that it does not make sense for Google to enter the over-crowded and low-margin hardware business if it does not expand their partners’ reach (advertisers). Moreover, it seems that the alliance they had put together is willing to run in the same direction to share the lucrative benefit of their partnership.

Android has today 3.9% market share of the global smartphone industry [Gartner], and by 2012 Android will become the world's 2nd most popular smartphone platform behind Nokia, pushing iPhone into 3rd place [Gartner] based on a US smartphone market reaching 160 million unit by 2013 [The Yankee Group].

It is evident that Google has self-imposed its limit and will try its best to [1] neither cross over the content bridge

“We are not trying to get into the content business” – Google co-founder Sergey Brin (Oct 7, 2009)